Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the LONG-RUN impact of a decrease in aggregate demand?
A)All prices adjust, and the economy returns to long-run potential.
B)There is a slow fall in prices as the short-run aggregate supply begins to have a positive slope, and the initial decline in output will increase.
C)There is a sharp fall in prices in the economy as business hurriedly lower prices to try to boost sales.
D)There is a recession as output falls sharply, and prices will not have had time to adjust.

Question

Quizplus · Accepted Answer

In the long run, all prices adjust to changes in aggregate demand, and the economy returns to its long-run potential output level. This is because firms have enough time to adjust production levels, and wages and other input prices have also adjusted to the new market conditions. Therefore, there is no need for a sharp fall in prices or a recession as output declines initially.

Given Your Knowledge of How Aggregate Supply Changes from the Very